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Climate-Related Financial Risks

Climate-Related Financial Risks

COVID-19 pandemic could exacerbate the impact of natural catastrophes

 

Although the pandemic dominates the world’s attention, climate risk is simmering in the background, with more than 3 in 4 (77%) CEOs and CFOs of the largest companies in the world admitting their firms are not fully prepared for the adverse financial impact of a changing climate. Moreover, 8 out of 10 (82%) believe their companies have somewhat to no control over such an impact on their business.

The findings stem from a global survey of several hundred CEOs and CFOs at companies with US$1 billion or more in revenue across a wide variety of industries in North America, Europe and Asia Pacific. The research was commissioned by FM Global, one of the world’s largest commercial property insurers, and conducted by ENGINE Insights, a leading market research and analytics firm.

Three-quarters of respondents (76%) said their organizations are somewhat to significantly exposed to climate risk. Floods, droughts and wildland fires topped the list as the three exposures that “concern their companies the most” and “could most negatively affect their financials.”

“The findings are concerning as hurricane and wildfire seasons begin in the U.S. and the threat of flood is on the rise globally, combined with the challenges the pandemic has placed on businesses – many of which are fighting to survive and recover,” said Katherine Klosowski, vice president, manager of natural hazards and structures, FM Global.

“The combination of being underprepared for natural catastrophes, volatility in financial markets, and the threat of an economic recession couldn’t come at a worse time for many companies,” added Klosowski.

The survey results build upon the World Economic Forum’s report from earlier this year, released just before the pandemic struck, that declared extreme weather events plus failure of climate change mitigation and adaptation as top risks over the next 10 years.

“Fortunately, most losses stemming from climate-related events are preventable, and loss prevention can help preserve a company’s value and resilience, especially during the pandemic,” says Klosowski. “However, the challenge many companies will face is adequately preparing for such events if stay-at-home orders remain in place, which could exacerbate the impact climate-related events have on an already fragile bottom line.”

In an interview with SCMR, Klosowski observed that supply chain trends like near-shoring might help mitigate risk of future disruptions.

“And businesses also need to consider disruptions from climate risk where a hurricane, flood, or wildfire may impact a large geographic area,” she says. “The goal is to ensure multiple suppliers are not subject to the same event.”

She also noted that a resilient supply chain is often comprised of multiple strategies: near-shoring, redundant suppliers, stockpiles in multiple locations, and business continuity plans.

“Many businesses go as far as evaluating their supplier’s exposure to risk from natural hazards and will work with them to reduce the supplier’s risk of disruption,” she says.

Finally, Klosowski notes that natural hazard (e.g., wildfire, flood, hurricane) doesn’t have to lead to a natural disaster (e.g., widespread destruction to businesses and residences).

“New development in natural hazard zones should be avoided where possible,” she concludes. “If that’s not possible, then adopt proven techniques to reduce the risk, such as fire-resistive construction, flood barriers, and hardening the building envelop. Businesses that do are the ones that remain in business.”

(scmr)

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